PROPERTY MARKET CRASH: WILL REAL ESTATE DROP 40%?
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There is a culture of property obsession among Australians. People are addicted to property and property prices. Now, everybody’s asking, “will there be a property market crash soon?”
In this video, I’m going to play the devil’s advocate to the property bulls and explain why the property market can drop 40% in the coming years.
I did a video few weeks back on why I think property prices can double in the next five years.
(Read here: https://willbellmortgagebroker.com.au/property-prices-can-double-in-the-next-5-years/)
But today, I’m going to talk about what could happen on the other side of the scale in terms of the property market crashing and falling into a big slump.
I’m going to go into why predictions made in the past have been that we will see a 40% drop, which has been a common theme probably for the past 15 years as I remember it.
I’m also going to give you my opinion on whether or not I think that’s going to happen now and what I think is actually going to happen in the future.
My opinion is unique compared to what most people think, so stick around for that.
Before we start, if you like this topic about the property market crash, please like and subscribe! It does mean a lot, and it gives me the ultimate feedback on what I should or shouldn’t be talking about in these videos.
So, as I mentioned at the top, 40% has been a common number for a long time.
There are several guys who have predicted this over the years, but there’s one famous I can remember which was made by Steve Keen.
In November 2008 as the global financial crisis was at its worst, Keen predicted and bet that Australian house prices would plummet by 40%, but then lost his bet.
Steve, for his punishment, agreed to walk 224 kilometers from the Parliament House in Canberra to the summit of Mt Kosciuszko. That’s a pretty far walk that would take him more than a day!
So, I think that was the moment where the property bulls have kind of used social media to basically talk down anyone proclaiming to be an expert about the property market that was going to talk negative on the property market.
Now, at this point, I think it’s fair enough to go and understand why all of these people think that the property market is well overvalued.
Are Australians addicted to debt?
For the last five years, we’ve had a guy called Martin North, and I guess in a way he’s taken the baton from Steve Keen. Let’s go to that famous 60-minute interview he did in 2018 where he reckons that property prices are likely to drop 40% by 2019. (footage plays)
Well firstly, he said that the problem is obvious – Australians are addicted to debt.
That’s one of the reasons that keep on coming up time and time again – the debt level.
Secondly, I remember at the time they were making a big deal about liar loans. UBS bank (don’t even know what they’re doing in the Australian mortgage market, by the way), did a study of about 900 loan applicants and it uncovered that 30% of people had lied on their home loan applications.
The doomsdayers took this and added it to the debt addiction issues.
And thirdly, report came out which basically said that in 2014 or 2015 the market was full of interest-only loans. It said that up to 40% of the entire home loans were interest-only loans. What’s the problem here?
Since there’s no need to pay down principal at first, the required payments are much lower during the interest-only period. However, when that interest-only loan expires, it will roll over to principal-and-interest. When that happens, there is a significantly huge increase in the required payments.
So the thought was that most interest only loans are five-years. If you take out a standard 30-year loan, at the end of the first five years, you’ve got to pay back the loan in the 25 years, instead of the original 30 years that you had.
This is a massive difference from your actual repayments when you go from interest-only to principal-and-interest after the five-year period.
So the theory and assumptions were, that this, combined with all the liar loans and all the debt addiction, were going to crash the market. But obviously, it didn’t end up happening and ultimately proved to be wrong.
40% Property Prices Drop?
So, what’s changed? Why do people think property market’s going to drop 40% now?
It’s actually the same old thing. People think that just because the prices have gone up a lot, we’re over leveraged and we cannot pay the debts. Cash rates have gone up 1.85%. Some people’s home loan rates have gone up double.
We’re going to see within the next 6 to 12 months if the property market does take a hit, because if anything’s going to make it drop, it’s doubling the interest rates.
So, we’ve got these issues – we’re addicted to debt, liar loan claims are still out there, the UBS keeps doing these studies that no other studies have been able to make and keep claiming liar loans, and then there is the big kicker which is the interest rates.
Now, what do I think about these things?
Firstly, guys like Steve Keen and Martin North get a lot of negative commentaries… and I’ve been guilty of doing that in the past.
But, I want to say that we need to learn how to respectfully disagree if we have separate views from the arguments that they make. We should be able to learn how to disagree respectfully.
When we want to take one side of the argument, we should be able to understand the different sides of that argument.
These guys are not stupid people. They’re intelligent professionals and we shouldn’t discount them because we don’t like the words that are coming out of their mouths. Yes, it’s healthy to be a skeptic, but you should not totally ignore these people. After all, even the boy who cried wolf was right eventually.
So, we shouldn’t discount the fact that the fears these guys are talking about may be exposed later on. I actually believe that a lot of these risks will get exposed; I just don’t agree that it will happen now.
It’s because I think they don’t understand timing the market and you can get obliterated if you time the market incorrectly.
Also, the main reason why I think people haven’t been able to time the market is because the government can step in at any time and save the day. If we’re being honest, our governments can think extremely irrational at times, and that is very hard to predict.
These guys couldn’t have predicted the massive amount or QE after the GFC or the dropping central bank rates to zero. They couldn’t have predicted the pandemic and the creation of 20-30% of more money and the 6% inflation.
To sum it up, I think the doomsayers are still not factoring in the ability of our government make decisions which will cushion the property market in a down economy.
So I actually think property market can have a 40% drop sometime in the future. I just don’t think it’s going to be now.
So that might mean the property price can double again before it drops back 40%.
I think the government have more levers to pull, because that’s actually been the case for a number of years now.
So does this mean you should go all in on property?
This is not financial advice, but firstly, you should manage your debt wisely because interest rates have been rising quickly for the last six months, and exposure to debt is a risk that could wipe you out.
This has been true for thousands of years.
Secondly, I’m a believer of diversification.
We cannot see what’s ahead of us. In 2018, when the economy was looking down and these guys were predicting a 40% drop in property prices, did you think prices were going to go up? Did you also think we’re going to have a pandemic and be locked down for two years here in Melbourne?
No one can predict what’s going to happen, so diversification actually avoids you from over exposure to risks that we can’t see yet.
Let me sum it up before I leave.
- Watch your debts levels.
- While we are obsessed with property, maybe you should seek to understand diversification.
- Lastly, I really think that the property market is more likely to go up by 40% before it goes down by 40%.
If you like this video, please like, subscribe, and leave a comment. If you disagree with what I say, please let me know your thoughts on the comments section, too and let’s have a healthy discussion.
Thanks for watching!
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